2022 Q4 Market Commentary

Last year, we used the first quarter market commentary to look back at the top stories of the prior year and look ahead to the coming year. Similarly, let’s review how well we anticipated the top themes of 2022 and look ahead to 2023.

First, here are the top stories that we anticipated would impact investment markets and results in 2022:

1. COVID-19 – There was hope that 2022 would be the year normalcy would return.
   • COVID-19 did become less of a headline and was replaced by other challenges as inflation and economic uncertainty roiled markets.
2. Federal Reserve (Fed) – Traditionally, stocks do well when interest rates are low. Most economists predicted that the Fed would begin to raise rates in 2022, but by how much?
   • The Fed made larger headlines than most expected by raising rates to their highest level in 15 years.
3. Inflation – The hope was that increases in inflation would slow down as supply chain issues dissipated, avoiding market turmoil.
   • Inflation did not subside quickly enough to avoid market turmoil. Only in recent readings have we begun to see inflation slowing down and even declining. However, it remained historically high for over half of the year.
4. Supply Chain Issues – Solving supply chain issues would be essential in slowing down inflation.
   • Supply chains did not return to normal for most of the year as China stayed closed. China has recently lifted their Zero COVID policy, but we have yet to see a significant positive impact to supply chains.
5. Job Market – Was the low unemployment due to a great job market, or were people leaving the workforce?
   • Unemployment continued to remain low for 2022, despite inflation and market turmoil. It remains uncertain why the labor market remained so tight; however, this appears to be changing with major companies announcing layoffs.
6. Chips, Chips, Chips – Where were the Chips? Semiconductors remained in short supply for much of 2022.
   • Recently, the industry seems to be making headway, though some of this is due to slowing demand and not increased capacity.
7. Midterm Elections – The 2022 midterm congressional elections could create market volatility.
   • The markets remained relatively sanguine during the mid-term election cycle, as it related to election news. However, inflation; interest rates; and economic concerns did weigh on the markets for most of the year.
8. Stock Valuations – International stocks looked cheaper than U.S. stocks based on a price-to-earnings (P/E) ratio, which is a tool for valuing a company that measures its current stock price relative to its earnings per share.
   • For only the second time in the last ten years, international stocks performed better than domestic stocks. In 2022 the MSCI EAFE Index returned -14.45%, and the S&P 500 returned -18.11%. As with almost all asset classes in 2022, international stocks were negative along with their U.S. counterparts.
9. Fixed Income – Interest rates were set to increase, but by when and by how much was unclear.
   • Most market pundits anticipated interest rates would begin to rise in 2022 as inflation began to creep up in late 2021. However, the pace at which the Fed raised rates was shocking. This is the fastest they’ve tightened since 1994.
10. International Conflicts – A possible invasion of Ukraine by Russia could rattle the markets.
    • Unfortunately, Russia did invade Ukraine in February of 2022 and the war continues with no end in sight.

Bonus:  Would the Braves or Dawgs repeat?

• I did not follow this story closely (wink, wink), but I believe the University of Georgia was able to win its second consecutive College Football National Championship and did it by the largest margin ever in a postseason collegiate football game.

Now that we’ve reflected on 2022, on to the themes we are watching for 2023.

1. Interest Rates – How close is the Fed to completing their interest rate hikes, and how long will rates stay at this level?
2. Corporate Earnings – What are earnings going to look like this year? We believe earnings will need to be strong to support increasing stock prices. Stocks cannot go up solely due to TINA (There Is No Alternative), which helped send stock prices higher when fixed income was paying historically low rates.
3. Recession Fears – Will we, or won’t we? Have we already? We will hear plenty about this, but I am not sure if entering a recession matters as much as the depth and length of the recession.
4. Ukraine – Do we see a conclusion to the war? Any scale-down from the current situation would be good for the people of Ukraine, Russia, and the world economy.
5. FAANG Stocks – For the majority of the past ten years, if you invested in Facebook, Amazon, Apple, Netflix, and Google (or a handful of other well-known tech companies), you likely did well in the market. However, in 2022 these stocks took a big step back, dropping 46.05% on average. These five stocks are approximately 13% of the S&P 500. Their performance is crucial to a market recovery.
6. International Stocks – As noted earlier, international stocks outperformed U.S. stocks in 2022. Will this outperformance continue in 2023? Valuations are still attractive, and if they do outperform, it will highlight the need for a diversified portfolio.
7. Debt Ceiling – Yep, it is one of those years. In June, the country will reach its borrowing limit and begin defaulting on its obligations unless the debt ceiling is raised. History tells us that an agreement will likely be reached but not before spooking the markets.
8. Inflation – Does the current trend hold up? Have we seen peak inflation? The consumer has held up so far during the worst of inflation, but many might be at their breaking point. If inflation shoots back up, consumer spending will likely pull back and impact corporate profits.
9. China – A big unknown on the path of dealing with inflation is the China effect. Does China’s re-opening lead to improved supply chains and lower inflation, or does it lead to more worldwide demand and, therefore, higher inflation?
10. Georgia Bulldogs – Can they three-peat? This has never been done in the modern era of college football. Will it have much of an effect on the economy or the markets? No, but it sure would be fun. P.S. – I think they do it.

There you have it, a look back and a look ahead. At Persium, we will continue to follow these themes and others that develop throughout the year and assess the impact on the economy and the markets. Although I’ve listed ten themes, the most important appears to be inflation and the Fed’s fight to stop it from getting out of control. We do not see anything that changes our thinking that a well-diversified portfolio, combined with sufficient cash reserves, is the most proven method for any market environment. Please contact us if you have any questions or want to discuss our predictions in more detail.

– Will Bowen, Relationship Manager

The views and opinions expressed are of Persium Advisors, LLC. This commentary is provided for educational purposes only and should not be construed as investment advice. Persium Advisors is an investment advisor firm located in Atlanta, GA.